On Wednesday, the Food and Drug Administration (FDA) approved the first weight-loss drug in over a decade. The company behind this drug is California-based Arena Pharmaceuticals (ARNA). As you might suspect, the shares jumped 30% on the news. But that was just a cherry on the cake. Over the past year, the shares have increased by more than 800%. The company's market cap a year ago was just over $200 million; today it is $2 billion.
Today's longshot is a company trying to make a business of investing in winners like Arena. In essence, it's a business that's going to bet on long shots in the life-sciences and biotech industry.
SWK Holding (SWKH) is $36 million market-cap company that has no significant operations yet. The company has $38 million in cash and less than $200,000 in total liabilities. Management is looking to invest the capital into a business or a series of businesses. Last month, the company stated that its first venture would be creating a specialty finance business and concurrently announced the hiring of a CEO.
SWK aims to use this specialty finance business to provide capital to early-stage life science companies. The company estimated that the addressable market for commercialized life science drugs exceeds $40 billion, and cited that in 2011, pharmaceutical royalty monetizations topped $2 billion. SWK plans to focus on pharmaceutical and medical device product royalties.
With credit markets still so tight, it is nearly impossible for smaller biotech companies to access attractive capital for an untested, unapproved drug or device. SWK wants to fill a gap in that arena. The market for this endeavor is very fertile, so the bet is that these guys will get it right. According to a company presentation, the worldwide royalty market has grown at 25% annually for the past decade. What is uniquely attractive about the drug industry is that the upside returns are often many multiples of capital invested but they have a low probability of a fully successful outcome.
But SWK will likely have the opportunity to invest in at various stages and is more focused on the actual royalty stream of a commercialized product than an early stage idea. The company also plans to create other specialty finance businesses in areas management deems attractive.
With more cash sitting on the balance than the entire company is worth, the equity will continue to have a safety net even as cash begins to be deployed. With the right bets, SWK could turn into a cash-generating machine, which will force the market to assign it a realistic valuation. If not, investors will likely be able to exit with enough cash on the balance sheet to provide a floor on the stock price.